Housing: Dealing With Real Structural Issues

Hugh PavletichCo
authorDemographia International Housing Affordability
Surveywww.demographia.comFellow – Urban
Development Institute of AustraliaPast President –
South Island Division – Property Council of New
ZealandChristchurchNew Zealand

New Zealand’s
“phony boom” or urban property bubble that got underway
around May 2001, caused by artificial land supply scarcities
and inappropriate infrastructure financing - is now
over.

REINZ data illustrates that in the month
of May 2001 - national median house prices were $NZ170,000
with monthly real estate agency sales of 6459 and
transaction volume of $NZ1.3 billion.

The bubble ballooned
out in March through May 2007 - when median house prices
inflated to $NZ350, 000, generating grossly excessive
monthly transactions of 10,989 and a transaction volume of
$NZ4.534 billion.

By June 2008 - national median house
prices had eased to $NZ340, 000 with monthly sales and
transaction volume falling dramatically to 4,305 and
$NZ1.740 billion – some 39% and 38% respectively of their
early 2007 peaks.

This phony boom provided the inflated
equity or fake value to allow existing owners of older
housing stock to leverage their way - fueled by further debt
– in to new more expensive housing and engage in
speculative activity - crowding out new buyers seeking
affordable housing. The performance of the housing
construction sector was degraded with the bubble inflating
– as the inflation taking place with the existing housing
stock, spilled over in to new house construction
pricing.

The normal development ratios for new urban
fringe housing should be around 20% for the serviced lot /
section and 80% to the actual house construction.

As the
housing bubble inflated - these important development ratios
became severely distorted to the extent some 50 – 60% of
the fringe new housing price went to the section / lot –
further unnecessarily degrading the quality of new housing
stock.

According to REINZ data – lot prices nationally had
moved from around $NZ80, 000 per lot in mid 2001 with
monthly transactions of $NZ50 million through to a price
peak of $NZ200, 000 in May 2008 and transaction volume peak
earlier in May 2007 of $NZ256 million.

The latest median
lot monthly sales price has since slumped to $NZ165, 000
with transaction volume of just $NZ52.8 million –the
transaction volumes (not inflation adjusted) now back to
where they were in February 2001 - when they totaled $NZ50.4
million.

The national figures understate the section / lot
inflation of the higher demand “attractor” metro areas
where fringe lot pricing of $NZ200, 000, $NZ300, 000 through
to $NZ400, 000 became common through the peak of the
bubble.

Local Government has persisted in strangling land
supply through this period – and still today - appears
oblivious to the economic and social consequences. It would
appear that the senior ranks of New Zealand Local Government
officials have been extremely generous to themselves through
this period of poor performance - as illustrated within this
article Councils' top pay rises 45pc .

Local
Government employees are excessively paid in New Zealand in
comparison to their counterparts in the United States and
Canada – particularly when New Zealand’s GDP per capita (similar to Macau,
Slovenia, Israel and the Bahamas) is taken in to
account.

Appallingly – in $US terms at current exchange
rates – the value of New Zealand’s (population 4.2
million) residential sector of approximately 1.6 million
units generally aged and sub standard units – exceeded
that of Houston (population 5.6 million) with approximately
2 million housing units. In the peak of New Zealand’s
bubble - its housing stock value was around $US480 billion,
whereas Houston’s is in the order of $US400 billion. Even
though - (according to US Bureau of Economic Affairs
figures) Houston’s GDP is around $US317 billion – New
Zealand’s a paltry $US105 billion.

Residential real
estate total value should not exceed around 1.5 times GDP.
If it does – it creates massive distortions throughout the
rest of the economy.

As these artificially created urban property
bubbles burst (as they always do) – real estate sales and
transaction volumes are the first to slump – until months
later - section / lot and house prices fall as well.

These local
government created artificial urban bubbles are bursting
elsewhere – with California leading the charge – and in
the process - nearly bringing the global financial system to
its knees. Currently bubbles are deflating within other
problem United States and Canadian markets – and those of
the United Kingdom, Ireland and New Zealand. Australia will
follow in due course.

Policymakers – particularly in the
United States - have been distracted applying “band aid”
solutions with injections of liquidity with other measures
to prop up the financial sector – and to date – not
focusing on the structural issues. It is these structural
issues artificially creating the land scarcities that
provided the foundation for these urban housing bubbles to
get underway in the first place.

Normally functioning
urban markets housing should not exceed three times
household income.

Houston, Texas is a helpful example of a
“normal market” where housing is approximately 2.9 times
household income. The Houston Association of Realtors website
provides excellent information on the housing stock
available within this dynamic and diverse urban market of
5.6 million people.

On the fringes of Houston - new ducted
air conditioned starter housing of 190 square meter living
space (plus garaging) is being provided at around $US140,000
and slightly smaller manufactured housing on lots is being
provided at $US73,000 – with manufactured house
construction component of it in the $US40,000 - $US50,000
range.

The fringes are the supply or inflation vent of an
urban market. Strangling them creates bubbles.

It is to be
hoped that researchers, commentators and the wider media
within the United States follow Professor Glaesers’ lead
and compare the performances of California and Texas.

It
is clear that a long overdue “culture of performance”
must be inculcated in to the local governments of urban
markets that have failed and artificially created these
destructive urban bubbles - as suggested within the
writers’ discussion paper Getting performance urban planning in
place and further explained on Television New Zealand.

There is no
“one simple solution” –but each jurisdiction in its
own way and mindful of its individual political culture –
must start getting the necessary performance measures and
processes in place – to restore housing affordability to
no more than three times annual household income - over a
reasonable and realistic time frame.

There is no
alternative – unless Governments at all levels wish to
stand idly by and allow their residential construction
sectors to collapse - as is happening currently in
California (CAR, CBIA, RealtyTrac, Housing Tracker, CBIA Recent Update, John Burn Constr Stats) and the United
Kingdom – where residential construction has slumped to
below 2 units per 1000 population on an annual basis –
well below replacement levels.

Do New Zealand and Irish
politicians wish to see their annual new residential housing
production collapse to British and Californian levels - of
just 8,000 units annually? New Zealand is currently
generating around 20,000 units – Ireland some 55,000 units
annually.

Australia – with heavy current inward
migration flows (being partially boosted by increasing
numbers of unemployed New Zealanders) of approximately
177,000 per annum and total annual population lifts of
around 320,000 – is grossly under building by at least
60,000 units annually.

In any event - the survivors of the
finance sector globally will likely be in no hurry
whatsoever to provide the financial support or “fuel” to
assist in creating further urban housing
bubbles.

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